Does Philenergy (KOSDAQ:378340) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Philenergy Co., Ltd. (KOSDAQ:378340) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Philenergy

How Much Debt Does Philenergy Carry?

You can click the graphic below for the historical numbers, but it shows that Philenergy had ₩22.0b of debt in September 2024, down from ₩31.0b, one year before. However, it does have ₩37.4b in cash offsetting this, leading to net cash of ₩15.4b.

How Healthy Is Philenergy's Balance Sheet?

According to the last reported balance sheet, Philenergy had liabilities of ₩68.9b due within 12 months, and liabilities of ₩8.95b due beyond 12 months. Offsetting this, it had ₩37.4b in cash and ₩20.8b in receivables that were due within 12 months. So its liabilities total ₩19.6b more than the combination of its cash and short-term receivables.

Of course, Philenergy has a market capitalization of ₩281.0b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Philenergy also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Philenergy grew its EBIT by 11% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Philenergy will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Philenergy has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Philenergy burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

We could understand if investors are concerned about Philenergy's liabilities, but we can be reassured by the fact it has has net cash of ₩15.4b. On top of that, it increased its EBIT by 11% in the last twelve months. So we don't have any problem with Philenergy's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Philenergy (including 1 which makes us a bit uncomfortable) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.